5 Reasons to be positive about the investment outlook
Bonds takes centre stage
Wednesday 2 August, 2023
After over a decade of suppressed interest rates and artificially low inflation, there is no denying that there are new challenges and headwinds facing investors, but with new challenges comes new opportunities.
We hope by highlighting just five reasons to be optimistic, we can instil some confidence that investment goals can still be achieved despite an ever-changing market backdrop.
It’s Barbie Time!
It’s Barbie time, as Bonds Are Really Back In Earnest. A recent Financial Times article cited this witty acronym, which succinctly captures the opportunity presented by fixed income assets following the incredible re-pricing of yields last year.
2022 saw bond markets have one of their worst years on record, which was largely due to the aggressive interest rate cycle central banks embarked on post-Covid-19 as a tool to try to fight inflation. Whilst this was extremely painful for investors, especially those with a more cautious or income orientated mandate, bonds today offer a return profile not seen for over a decade.
Equities are now no longer the only game in town when it comes to making money. The opportunities across the fixed income world have changed dramatically, and if rates have / are close to their peak, one can access high quality bonds paying healthy yields, without having to take on excessive credit or duration risk.
‘Shopping trolley stocks’; equities are still your greatest hedge against inflation
Equities as a widely accessible asset class provide investors with the best opportunity to beat inflation long-term. Even when they are impacted by anxious investors or poor sentiment in the short term, investing in quality businesses has the potential to benefit those looking to build wealth over the long-term.
What are the hallmarks of a ‘quality’ company?
We have built portfolios around owning these quality businesses. These are companies that invest in technology and embrace it, have pricing power and demonstrate monopolistic characteristics, possess solid balance sheets, have strong ESG practises, and are generally not exposed to cyclical areas or are too sensitive to interest rate moves.
What are examples of ‘quality’ companies in portfolios?
Whilst quality companies encompass a range of business types, they also include your small ticket, repeat purchase, everyday items – your ‘shopping trolley stocks’.
- Your Colgate toothpaste and mouthwash
- Your Dove deodorant and personal care products
- Your Nescafe instant coffee beans
- Your afternoon Kit Kat chocolate bar
These everyday items are necessities that consumers demand across all stages of the business cycle.
We like these businesses as the core of portfolios because regardless of what is happening in the world, we are all still brushing our teeth, using deodorant, and having cups of coffee.
Therefore, businesses providing these products can do well in both the good times, and in the bad times. They are usually able to deliver stable revenue growth regardless of economic conditions. They also have pricing power and the ability to pass on any of their own cost increases, to their end customer, increasing profitability. This is hugely important in an environment of volatile inflation and high interest rates.
Diversification is key
We construct portfolios with a strong emphasis on diversification. This is even more important in a challenging market environment. Having exposure to global businesses shields investors from any regional or sector specific events impacting their portfolios long-term. Regardless of the negative press around the UK economy, almost entirely all portfolios are invested in large global businesses, even those companies that are listed in the UK.
The role of absolute return funds
In periods where there is a widespread downturn across asset classes, Absolute Return funds can act as a ballast to your portfolio by providing the potential to generate positive returns when everything else, including generally ‘safer’ asset classes such as fixed income, is detracting from your portfolio. In 2022, rising interest rates adversely impacted both bonds and equities. As a result, we saw the Absolute Return funds in the model portfolios perform relatively well.
Irrefutable trends in Asia
We see Asia as a powerful tailwind for growth over the medium to long term. We truly believe the combination of undervalued currencies and favourable demographics, mixed with the fact that these economies are broadly in a different part of the monetary cycle, make them very attractive investments.
At a headline level, this year the performance from Asia has been disappointing, but under the bonnet some areas have performed well. China, in particular, has struggled on emergence from lockdown and their reopening fell below expectations which hurt Chinese stocks. Companies which were specifically aligned with the Chinese consumer disappointed on travel and spending. The lag from China has masked some of the attractive returns seen from other regions such as Vietnam and India. But the tide may be turning for China.
The Chinese Communist Party Politburo met last week and announced they plan to focus on economic growth, stabilising employment and restimulating the property market. Chinese stocks rallied on the back of this news. Although, only time will tell if this is a turning point for the region, but a sustain in the rally should act as a tailwind benefiting not only emerging markets but developed markets too.
Increasing likelihood of a soft landing
Data is beginning to suggest that the aggressive interest rate hiking cycle the Federal Reserve embarked on post Covid-19 to curb inflation is working. Inflation is coming down, consumer confidence is beginning to build, and the potential for a soft landing is becoming more and more likely in the US. This is great news for investment markets and client portfolios alike. In this environment, the high quality businesses we like should perform well, as should strategic and corporate bonds, and a soft landing scenario may act as a tailwind for higher potential long-term growth from Asia and emerging markets.
There will always be factors to be mindful of when investing, and we construct portfolios to ensure they have levers built in to provide protection. But just as Barbie learnt to see the positives of living in the real world when she left the seemingly perfect world of “Barbie Land”, there are plenty of positives and reasons to be optimistic today, and we hope we can help investors to embrace a little of their inner Barbie.
Risk warning
This communication is issued and approved by Lonsdale Services Ltd. It is based on its understanding of events at the time of the relevant preparation and analysis. The information and opinions contained in this document are provided by Lonsdale and are subject to change without notice and should not be relied upon when making investment decisions. The value of your investments and the income from them may go down as well as up and neither is guaranteed. Investors could get back less than they invested. Past performance is not a reliable indicatorof future results.
Changes in exchange rates may have an adverse effect on the value of an investment. Changes in interest rates may also impact the value of fixed income investments.
The value of your investment may beimpacted if the issuers of underlying fixed income holdings default,
or market perceptions of their credit risk change.There are additional risks associated with investments in emerging or developing markets. The information in this document does not constitute advice, nor a recommendation, and investment decisions should not be made on the basis of it. The material provided should not be released or otherwise disclosed to any third party without prior consent from Lonsdale.
